by the author of dead companies walking

Category Archives: crony capitalism

I have to admit, I’m looking forward to the Republican debate on Wednesday. Love him or hate him, Donald Trump’s candor is entertaining. It’s somewhat fun to watch him dismiss his political opponents (including the sitting president) as “losers” and “lightweights,” and his critiques of my industry—which he refers to as “those hedge fund guys”—are mostly spot on. Too many big fund managers really are little more than under-taxed, economically destructive financial engineers. Trump’s strident anti-immigrant rhetoric is far more troubling, but it’s not hard to see why it appeals to voters who feel left behind by globalization and the increasingly polyglot composition of America’s electorate.

Most economic studies show that immigration, legal and illegal, is a net contributor, not a cost, to economic growth. Three decades ago, the legendary University of Chicago economist Milton Friedman noted that the majority of illegal immigrants work, pay income and payroll taxes, but rarely receive government benefits like Social Security and Medicare. Mr. Trump, on the other hand, has frequently been on the receiving end of government largesse. Despite his professed belief in free markets, he is the prototypical crony capitalist. Without all sorts of tax breaks, debt forgiveness, and giveaways, he would be far less rich.

Another week has brought yet another much-publicized call for the Federal Reserve to delay raising interest rates. Yesterday, the International Monetary Fund opined that the Fed should hold off on a rate hike until 2016.

Two important and closely connected events took place in the world of finance since my last post. First, former Fed chair Ben Bernanke announced that he was taking a job as an “advisor” at the massive hedge fund Citadel Group. Then the stock of Goldman Sachs hit $200 for the first time since January of 2008. You might not think these things are related, but to me, they’re inextricably linked–and extremely dispiriting.

More than half a century ago, President Eisenhower warned the nation about the burgeoning Military-Industrial Complex. That monstrous public-private hybrid now sucks up more than half of all discretionary spending. But these recent events prove that the Wall Street-Washington Complex might be even more dangerous.

[note: this post originally appeared on my Yahoo! Finance contributor page]

For the past few weeks, Wall Street pundits and prognosticators have been loudly citing every hint of bad economic news as a reason the Fed shouldn’t follow through with its pledge to boost interest rates. “Corporate earnings are down!” they’ve shouted. “Job growth is decelerating! Inflation dropped to zero again! We can’t raise rates in this environment!”

It’s time to stop listening to these market Cassandras. We not only should raise rates, we must raise rates.

Last fall, I blogged about possible ways to disrupt and improve our vastly overpriced and underachieving higher education system. One of my bright ideas went as follows:

[T]here’s no reason [Harvard] shouldn’t build more campuses in other locations, increasing enrollment even more. If its product is so great, why not scale it out?

Fast forward to this week when I opened the latest Barron’s and discovered that Harvard’s biggest rival is already doing just that:

Yale University has done something that no other Ivy League school has attempted: built a new version of itself halfway around the world, in Singapore.

I believe we’ve got things backwards in this country when it comes to higher education. In my opinion, a university’s reputation shouldn’t be based on how exclusive and expensive it is–that is, how much it costs and how few young people it educates. I think we should reverse that equation and judge our elite institutions by how many quality educations they provide, and at what value. Yale’s experiment in Singapore is a good first step in the right direction (even if it is in China), but it’s not addressing the biggest problem in higher education today:

First off, I’d like to thank Chuck Jaffe for a great chat about Dead Companies Walking on his MoneyLife podcast. I enjoyed it. You can listen to our conversation below (or, if you are reading this on email, you can download MoneyLife’s January 28, 2015 podcast on iTunes or by clicking here):

Last week it was widely reported that regulators slapped a $43.5 million fine on multiple investment banks for passing off overly positive research analysis on the now private retailer Toys R Us. They did this hoping to curry favor with the current owners of Toys so that the company might pick those Wall Street firms as bookrunners for a possible Toys initial public offering.

I was shocked to hear this. Not shocked because news broke that some purportedly objective research from Wall Street turned out to be bogus, but because that is news at all. By now, I figured everyone–and I mean everyone–knew that recommendations from Wall Street always have been and always will be skewed at best and flat-out misleading at worst.

Just in time for the release of Michael Lewis’s new book, Flash Boys, news came down this week that several high frequency trading firms have been subpoenaed by New York’s attorney general.

As Lewis writes about, HFT is a new variation on one of the oldest scams in the money management game: front-running. In simple terms, high frequency traders use sophisticated methods to detect and profit from tiny fluctuations in stock prices. They usually earn pennies a share or less on individual trades, but they execute huge numbers of transactions to earn huge (and largely risk-free) returns. One New York HFT shop recently acknowledged that it had made money on over 1000 consecutive trading days using this strategy.

Like all front runners, HFTs exploit advance information about a security that is unavailable to the wider markets. The losers in this and all other forms of front-running are Jane and John Q. Public–the poor schmoes who play by the rules and wind up paying more when they buy stocks and earning less when they sell them. In other words, HFT is yet another example of Wall Street insiders turning our financial markets into the equivalent of the 1919 World Series–a rigged game.

Welcome to my new blog. I’ve been managing money successfully for three decades now and I’ll be posting regularly about investing and finance. I’ll probably spend a good amount of time complaining about my industry, too. What can I say? I’m kind of an odd bird–I’m an investment manager who despises just about everything about the investment business and Wall Street in general. With that in mind, I’ll start things off with a post on what you might call an “oldie but a goodie”—the infamous Wall Street bailouts of 2008, and something almost nobody understands about them.

David Stockman wrote something very true and yet very taboo recently. In a New York Times piece published last week, the former congressman and Reagan budget director argues persuasively that, despite what just about every pundit and politician has been saying for five solid years now, those bailouts did NOT “save us from the next Great Depression”:

"[Scott Fearon's] insights on the common ways that mature companies often doom themselves apply equally well to start-ups. Every business, young or old, needs to avoid the ... mistakes that he outlines."

About the Author

Scott Fearon has spent thirty years in the financial services industry.
Since 1991, Scott has managed a hedge fund in Northern California that invests in fast-growing companies with little or no Wall Street coverage while shorting the stocks of distressed businesses on their way bankruptcy.